Georgia struggles with separation of private wealth and public office

By bne IntelliNews April 15, 2013

Molly Corso in Tbilisi -

The plans of Georgia's new billionaire prime minister, Bidzina Ivanishvili, to create three new investment funds - not to mention his former bank's multi-million-dollar donation to victims of recent storms - are raising fresh questions about the degree of separation necessary between private wealth and public office.

Conflicts of interest are nothing new in Georgian politics - several supporters of President Mikheil Saakashvili's United National Movement (UNM) party reportedly prospered by marrying politics with their business ambitions. But Ivanishvili's deep pockets have long been a pull for voters, especially since the billionaire entered Georgian politics, creating an arena where personal fortune and public largesse are often prioritized over policy and rule of law.

Ivanishvili's money loomed over the 2012 parliamentary election won by his Georgian Dream alliance. During the bitter and often ugly campaign, his wealth attracted fines from the former government desperate to hold onto power as well being the source of promises to voters. Those promises have continued after the election: during his October 5 meeting with business leaders, Ivanishvili floated the idea of using his own money to fill budgetary gaps. He has also spoken openly about putting his own fortune in a new private equity fund that would finance investments in Georgia.

There are no restrictions in Georgian law that stop individuals from granting funds to the state budget. However, economist Paata Sheshelidze warns that Ivanishvili's habit of speaking about his wealth and pledging to use it for various programmes or charities could technically be breaking the law, because legally he was required to separate himself from control of his billions when he took office. "As long as he is prime minister, he is no longer part of the decision making of [his personal fortune]," Sheshenidze says. "He has no decision-making power, so if he said it publically, he broke the law... He must say that he might advise somebody... he must not say that he will put the money [in a specific investment]."

In January, the financial group that Ivanishvili founded, Cartu Group, made good on the PM's promise to aid families in Kakheti who suffered during a series of brutal storms last summer. Cartu Group signed a contract with the Ministry of Regional Development and Infrastructure, pledging GEL95m ($57m) for the 25,800 families affected by the storm. Ivanishvili no longer owns the group; however, his son Uta owns 8.25%, according to ownership documents filed with the National Bank of Georgia. The funds are being disbursed by the Cartu Group, not the ministry, noted Minister of Regional Development and Infrastructure Davit Narmania, who dismissed charges that the aid constitutes a conflict of interest.

Blurred lines

Ivanishvili's plan to create a new private equity fund - and be one of its investors - is also drawing criticism. The prime minister has repeatedly announced plans for three other new government-run investment funds: a $2bn sovereign wealth fund, an agriculture fund and a venture capital fund. While the private equity fund would be separate from those planned government funds, Ivanishvili's tendency to speak about them together has fueled confusion and speculation that he will also finance part of the sovereign wealth fund.

Vakhtang Lejava, chancellor of the Free University and an economic advisor to former prime minister Nika Gilauri, notes that the financing for the $2bn sovereign wealth fund, which would control state assets like the railways and energy, is unclear. "My question is how the investment fund gets money. We know only one, just one declared source of possible investment: the prime minister's private wealth," Lejava says. "Investing money means being a partner... Some people think this is a great thing for investors, but there can be skeptism about that as well, as to how this will be perceived."

However, Giorgi Bachiashvili, deputy CEO of Partnership Fund - an investment fund set up by the former government to provide financing for large investments that banks were wary of underwriting - stresses that Ivanishvili's personal fortune will not play any role in the $2bn sovereign wealth fund. Bachiashvili, who is working with the government to create the new sovereign wealth fund, says Ivanishvili is planning to invest in a private equity fund that will be funded by a group of wealthy Georgians who will be passive investors in businesses, independent of the government. "Mr Ivanishvili will have nothing to do whatsoever with the sovereign wealth fund... This will be a completely private entity," he says.

If investors are concerned about a potential conflict of interest, Bachiashvili says, there are plenty of avenues for them to speak out. "Trust me, the level of transparency that the new government has, the level of freedom of press, if some investor finds himself disadvantaged because some other guy has an investment from the private equity fund, there will be a big scandal."

Ivanishvili himself has downplayed concerns over how investors will perceive the prime minister as an investor. "I will not have any connection with the funds... I am not hiding anything and there is nothing to hide," he told a press conference on February 5. "It is not important who invests how much in what... I will not have any contact" with the investments made by the fund.

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